People often confuse Mutual Funds and SIPs to be the same. It is easy to find yourself confused and overwhelmed by the amount of information that is available on Mutual Funds and SIPs. That’s not true at all. There are fundamental differences between SIPs and mutual funds.
Difference between Mutual Funds and SIPs.
Mutual funds are instruments for investment. Here, the savings of various investors are pooled to invest in shares, debt securities, money market securities, etc. In simple words, mutual funds further invest your money in:
- Debt instruments: Debt mutual funds.
- Equity: Equity mutual funds.
- Hybrid Instruments: A mix of both equity and debt funds.
Other major categories include Index Funds, Liquid Funds, Gilt Edged funds, etc.
On the other hand, SIP, i.e. Systematic investment plan is a method of investing in mutual funds. It is not a product, investment option or instrument in itself. It is just a process through which you can contribute small but regular amounts to build a good corpus. It is usually considered a good method if you have a long-term investment goal.
SIPs are considered to be the most effective means of investment since they allow you to invest in mutual funds for the future without disturbing your present lifestyle and expenditure pattern. You can invest small amounts on a regular basis either weekly, fortnightly or monthly as per your convenience.
With SIPs, a specified amount is auto-debited from your account at a particular time. You can also invest in a plethora of financial instruments like equity mutual funds, debt mutual funds, etc. based on your risk horizon and financial goals. Investments through SIPs usually gives you better returns, in the long run, i.e. if invested for a longer period. Investing in SIPs also encourages and helps you develop a habit of investing since a fixed sum is to be invested at regular intervals. You can benefit out of cost averaging, i.e. buy more units in a low market and fewer units when the market is high, thus reducing your average cost of purchasing.
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